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This is what i have learnt, and found to be "mostly" true.
This i have also found to be true although a rare event.
I think i have found a way around that, using a methodology involving the use of a very small position size, low cost brokerage, no leverage and the acceptance of the rare total loss of a position or 3 over time. This would allow the investor to be "wrong" and only suffer a small $ loss, so that any one investment cannot hurt you financially or psychologically.
While leaving the investor open to the potential SP recovery and opportunities that may arise from holding the (loser) stock...im going to try this with my new IB account, recycling capital from the winners as per usual and avoiding the more speculative prospectors and bio techs etc.
Hi So_Cynical and galumay,
I think we are mostly in agreement here.
Buying on the downturn (or not selling) may result in large losses sometimes, but by picking good companies with enough margin of safety, it is a very rare event. The potential of the upside, however, is much greater. With minimum diversification, this is the right thing to be doing.
This made me smile.... my philosophy the exact oppositeSelling a company just because the price has dropped is just plain lazy (IMHO).
So good companies and minimum diversification are the ticket to investment success, eh!
When considering "event rarity" and "safety margin" one might benefit from reflection on the outcomes achieved by former, minimally diversified, investors in "good companies" like HIH, Davnet, ABC Learning, Babcock Brown etc.
So good companies and minimum diversification are the ticket to investment success, eh!
When considering "event rarity" and "safety margin" one might benefit from reflection on the outcomes achieved by former, minimally diversified, investors in "good companies" like HIH, Davnet, ABC Learning, Babcock Brown etc.
This made me smile.... my philosophy the exact opposite.
If you really believe that you're smarter than the market and that the cpy really is worth more than it thinks it is today, it's likely you can take advantage of an even better price tomorrow. The market frequently has a different time frame from me which stop losses help take advantage of. Of course, you can hedge your bets by selling half at the stop loss, just in case you're the unluckiest guy in Australia who happens to sell at the exact bottom.
Hmmmm they were not good.businesses, too much debt, low ROE and poor cash flow.
I think the market is correct most of the time, .....
But by this logic, once the price has gone down, why sell? The market has already priced it correctly
Because the price will to continue to go down,
If the price has gone down (& presumably is trending down) the market is giving you an opportunity to sell today & buy cheaper tomorrow... that's why I consider it lazy to not accept that you were wrong & grasp the opportunity the market its giving you.
Back in the old days it would have been easier to have agreed with you, but with todays good data feeds and v. low txn costs it's more profitable to acknowledge poor timing/bad analysis/change of circumstances/bad luck/etc even for a fundamentals based investor.
Of course there are no certainties regarding tomorrow, only balance of probabilities. One certainty is that the timing of the entry could have been better.There is no certainty though, as above, it may go down more, it may go up, it may stay the same.
Absolutely. Combining a falling SP, bearing in mind that round trip txn costs are ~0.2% (far less than the daily range of most stocks), and that FA is more likely to be objective with no existing position, my contention is that it's close to a 'free lunch' to be able to take advantage of irrational market mis-pricing and sell today with the likelihood of being able to buy back at a better entry price tomorrow, while still maintaining FA principles.Personally I believe that as a fundamental investor I have to assess the reason for the drop in price and make an informed decision about the best action consistent with the facts I have at hand.
Nice post – especially the bolded bit.This is just going around in circles, isn't it?
If you buy "great" companies of course you are going to be fine in the long run. That's the definition of "great'.
By not planning to sell your investment, you are backing your ability to pick great companies. By having a plan to sell your investment, you are preparing for the probability that you will pick some duds. It's up to the investor to decide which one is more realistic for themselves.
If the odd position becoming a total loss is acceptable within your risk appetite, who's to say you can't do it this way? What gets some investors however is when they average down until a large chunk of their net worth is locked in a company that is deteriorating in fundamentals, yet they bury their head in the sand ignoring such changes, or talk themselves into believing that things will improve next quarter / half / decade...
The trick in that isn't just diversification, it's position sizing for risk.
It’s very easy to label longer term fundamental strategies as buy and hold and make the wrong assumptions about the “hold”By not planning to sell your investment, you are backing your ability to pick great companies. By having a plan to sell your investment, you are preparing for the probability that you will pick some duds. It's up to the investor to decide which one is more realistic for themselves.
We are just trend followers - But the trend is defined by the business performance. The last thing you want if you have an analysis edge is to allow yourself to be continuously called offside on a great business by the price action noise - hence no price based stop.
To me not having a plan to sell does not mean that an investment won’t be sold – It just means the information to trigger a sale does not yet exist.
The trick in that isn't just diversification, it's position sizing for risk.
Hmmmm they were not good.businesses, too much debt, low ROE and poor cash flow.
But do note some of my criteria for "good" companies:
- low or no debt.
- management with large ownership of the business.
- good ROC
- few acquisitions.
- simple to understand (for me, and yes, this is subjective).
How many of the listed companies above met all of these? None, I think.
How about coming up with a list of companies that match my criteria that have gone under? I am not saying that there are none, just that the chance of it happening it is so low, that diversification already takes care of that risk, there is no need for further risk mitigation (for this) with stop losses.
You are also putting words into my mouth that I never said. I never advised for minimum diversification, I stated that to take away the risk of losing all/most of your money, only minimum diversification is required. 5+ to be precise.
For me part of the risk assessment is its impact on my ability to sleep well at night - that may not sound very logical or objective but its part of my psychology of investment.
By examining the historical performance of a larger sample of companies meeting your criteria, you'll be better equipped to quantify the risks rather than simply declaring "that the chance of it happening it is so low, that...
Because the price will to continue to go down, unless you are the unluckiest guy in Oz & sell at the exact bottom. I disagree that the market always prices correctly. The market only tends towards pricing correctly in the long term, it is only sometimes correct in the short term. If the price has gone down (& presumably is trending down) the market is giving you an opportunity to sell today & buy cheaper tomorrow... that's why I consider it lazy to not accept that you were wrong & grasp the opportunity the market is giving you.
This is just going around in circles, isn't it?
If you buy "great" companies of course you are going to be fine in the long run. That's the definition of "great'.
By not planning to sell your investment, you are backing your ability to pick great companies. By having a plan to sell your investment, you are preparing for the probability that you will pick some duds. It's up to the investor to decide which one is more realistic for themselves.
If the odd position becoming a total loss is acceptable within your risk appetite, who's to say you can't do it this way? What gets some investors however is when they average down until a large chunk of their net worth is locked in a company that is deteriorating in fundamentals, yet they bury their head in the sand ignoring such changes, or talk themselves into believing that things will improve next quarter / half / decade...
The trick in that isn't just diversification, it's position sizing for risk.
Nice post – especially the bolded bit.
I Just want to expand on this a bit. It’s very easy to label longer term fundamental strategies as buy and hold and make the wrong assumptions about the “hold”
To me not having a plan to sell does not mean that an investment won’t be sold – It just means the information to trigger a sale does not yet exist. Not having a price based stop means you are backing yourself to interpret future developments correctly. After a decade or so of no adverse information flow negating your early assumptions about the potential quality of a company and you might just have found yourself riding a life changing “great” company trend.
We are just trend followers - But the trend is defined by the business performance. The last thing you want if you have an analysis edge is to allow yourself to be continuously called offside on a great business by the price action noise - hence no price based stop.
Agree and I certainly don't adovate a price-based stop on fundamental positions.
To me not having a plan to sell does not mean that an investment won’t be sold
Also agree and a nice way to describe perhaps what KTP is saying.
Yes everybody knows that now that they've gone under!
I've no doubt that some of the more astute investors here at ASF (several of whom are contributors to this thread, including yourself) would have recognised the dangers and mitigated any perceived risks. It is important to note, however, that many analysts and investors failed to recognise the early warning signs!
That's an excellent suggestion! By examining the historical performance of a larger sample of companies meeting your criteria, you'll be better equipped to quantify the risks rather than simply declaring "that the chance of it happening it is so low, that..."
So what's stopping you? This is your strategy remember! Hop to it!
So exactly which part of "With minimum diversification this is the right thing to be doing." didn't you say in the post to which I was responding?
Using my own experience.
- All Data: June 2007 to July 2013
- Total Stocks held = 50 (often multiple positions)
- Total stocks to go under = 4
Of those 4 i was holding 1 at the time it went under (100% loss), the other 3 were exited at 66% loss, 5.8% Gain and 0.9% gain.
And i buy stocks that are falling thus pre disposing myself to disastrous stocks and potential wipe outs and yet just 2% of my stock selections have proven 100% disastrous (to Me) over the last 6 years, a period of time covering the GFC.
I also find that long term (10+ years), it is near impossible to predict which good companies will appreciate 50% vs 1000%+. So it makes sense to invest in a few good companies, beyond what minimal diversification calls for.
I might be misunderstanding you but the above reads as though you are saying to have sold at close to the highest point in 2008 would have been the worst possible time. If you had had a moving stop loss in place to protect your profits how could you have 'sold at the worst possible time'?It was from the highest point in 2008, the worst possible time you could enter the market, as the priced crashed soon afterwards. I certainly don't expect this to repeat too often, I would certainly expect most years to be substantially better!
If I had stop losses or other auto-sell criteria, I would have not only sold most of those stocks, but I would have sold them at the worst possible time.
Perhaps so. But is an index fund what you should be comparing your outcome with? Rather you should imo be thinking how you could have maximised your profit, and you could have done this by (as above) preserving not only your profits but your capital, then when an uptrend returned taking the opportunity to buy back in.Holding on to them until now proved to be a substantially better investment than an index fund.
Exactly. They were all market darlings for some time.Yes everybody knows that now that they've gone under!
As they also failed to even recognise the signs of the impending GFC itself. Why, otherwise, did so many investors lose half their asset base during the GFC as the learned advisers continued to admonish them to "just hold on, it will all be fine"?I've no doubt that some of the more astute investors here at ASF (several of whom are contributors to this thread, including yourself) would have recognised the dangers and mitigated any perceived risks. It is important to note, however, that many analysts and investors failed to recognise the early warning signs!
I might be misunderstanding you but the above reads as though you are saying to have sold at close to the highest point in 2008 would have been the worst possible time. If you had had a moving stop loss in place to protect your profits how could you have 'sold at the worst possible time'?
To have done so would have preserved your profits and allowed you to wait the downturn out before buying back in at considerable advantage.
Perhaps so. But is an index fund what you should be comparing your outcome with? Rather you should imo be thinking how you could have maximised your profit, and you could have done this by (as above) preserving not only your profits but your capital, then when an uptrend returned taking the opportunity to buy back in.
Given the market approximately halved during the downturn you'd have been able to buy about twice as many stocks at or near the bottom, plus of course as a further result, enjoy about twice the yield.
Exactly. They were all market darlings for some time.
As they also failed to even recognise the signs of the impending GFC itself. Why, otherwise, did so many investors lose half their asset base during the GFC as the learned advisers continued to admonish them to "just hold on, it will all be fine"?
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